The Green Wave in Fintech – A Primer

[Editor’s note: This is part of a series of articles we are publishing from Wharton Fintech ahead of LendIt Fintech USA. They are covering topics that will be addressed at the big annual event next week. This first piece is by Anirudh Singh, Wharton Fintech Head of Media; Wharton MBA Class of ’22.]

On April 15, Google Earth released Timelapse in Google Earth, to highlight how much our environment has changed over the past 37 years. The 24 million satellite photos compiled together serve as yet another stark reminder of the impact human activity has on the world around us. Much like with the covid-19 pandemic, individuals, governments, and corporations will all play a part in fighting climate change. Financial services companies are no exception. The OECD estimates that a total of $6.9T will need to be invested annually until the year 2030 to meet climate and development goals set by the Paris Agreement, a target that will be a lot easier to meet with the help of the private sector. Below are a few of the ways fintech companies have played their part:  

ESG Rating Services:

Environmental, Social, and Governance (ESG) rating services are platforms that collect data based on various ESG parameters on behalf of investors, companies, and funds. In the past year alone there have been numerous acquisitions of ESG rating companies by major stock exchanges. In January of 2021, the London Stock Exchange completed its acquisition of Refinitiv which, among other products, provides ESG scores across 10 main themes, including emissions data. In April of this year, MorningStar bought Sustainalytics, a leader in ESG and corporate governance ratings. Morningstar CEO Kunal Kapoor said, “the company expects environmental, social, and corporate governance factors to become the center of client portfolios.” Providing transparency on a company’s emissions footprint will provide retail and institutional investors a key lever in rewarding companies that are doing well, and shifting away from the ones who aren’t.    

ESG Investing:

ESG rating services may feel like a checkbox activity if it weren’t for the noticeable impact ESG metrics are having on the world’s top investment vehicles. Per a Harvard Business Review study across 70 executives and 43 institutional investing firms, ESG has become a top priority when making investment decisions and has become increasingly important in middle management day-to-day activities. While Blackrock’s Tariq Fancy (Chief Investment Officer of Sustainable Investing) admits the change hasn’t happened at the company overnight, he believes the increasing millennium workforce “expects us to integrate sustainability as a natural part of our daily work”. You can check out Lendit Fintech’s panel of ESG investing for social impact, with speakers from Betterment, Open Invest, Haitou Global, and Impact Shares, to hear more. 

Green Bonds:

The Climate Bonds Initiative has seen a noticeable increase in Green Bonds, whose proceeds go towards environmental projects. Climate Bonds have hit $1 trillion in total issuance since inception in 2007, with over $100 billion in investments in 2021. Recent examples of corporate green bonds include a $500 million bond issued by Goldman Sachs for solar generation and a $650 million bond by PNC for energy generating projects. While this is an important step, the industry remains significantly behind the necessary pace to meet the goals set by the Paris Climate Agreement. Fintech’s have a role to play in Green Bond issuance. Blockchain technology can help expand the pool of potential investors and help track the progress made by clean projects. Rating companies, in turn, can use the success of green bond projects to more accurately score a company’s ESG commitment. 

Carbon Offset Marketplaces:

Roughly 400 of the world’s largest 2,000 companies have announced net zero emissions targets. Many of these companies use carbon offsets to reach net-zero emissions. While the current market size of carbon offsets is relatively small ($0.6B in 2019), there is a significant opportunity for growth. Some fintech companies, like Cloverly and NetZero, have taken a unique approach to automating the procurement of offsets. They track corporate or individual activity through bank account data, automate offset purchases based on this data, and provide recommendations to reduce carbon emissions overall. 

Sustainability as a Core Value:

A number of fintech companies are making sustainability one of their core values, even if it is not part of their primary product. Aspiration is a neobank focused on sustainability. It promises to plant a tree for every debit card transaction its customers make when they round up to the nearest dollar. To date, they have planted over 3.5 million trees. The company also donates 10% of its earnings to charitable activities around the United States. They certainly are not alone. The Lendit conference will feature a number of other socially conscious companies, including Ad-In Ventures, Climate First Bank, Meniga, Sunlight Financial, and Stripe Climate. 

The Blockchain Mixed Bag:

Recently, there has been significant news around the negative impact bitcoin, and blockchain technology overall has on the environment. The data is staggering. Mining bitcoin consumes more energy per year than the country of Argentina, and bitcoins carbon emissions are on track to equal London’s. There is some silver lining when it comes to blockchain technology. In 2017 the World Bank highlighted a number of use cases for blockchain, including supply chain transparency, the trade and exchange of carbon credits, and climate finance. For example, Energy Web is a non-profit organization looking to accelerate the use of low-carbon / no-carbon energy. The company has launched an Energy Web Zero product, used to digitally source verified, emissions-free renewable energy. Still, blockchain technologies need to find a permanent solution to their carbon footprint problem or risk their ability to scale. 

Conclusion:

I’m so excited to see “The Green Wave in Fintech” featured on Day 3 of the Lendit Fintech conference. While it may be easy to assume climate activism is not in the purview of fintech companies, that is simply not the case. It needs to be a key factor for all companies moving forward. If fintech companies that are still in their growth phase and fighting to reach profitability can be environmentally and socially conscious, why can’t others?

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